Tag: Amazon Tax

The following article originally was published March 19, 2010, by Grand Junction’s Free Press.

Legislative assault on Amazon hurts Colorado business

by Linn and Ari Armstrong

We told you so. On February 24, Governor Bill Ritter signed a number of business-killing tax measures, including Bill 1193, which attempts to collect taxes for out-of-state sales. The law imposes high compliance costs and red tape. Informally it is called the Amazon Tax.

Last week, Amazon cut off its Associates program in Colorado, meaning the company will no longer pay commissions to those who advertise for Amazon online. Other retailers have either cut off affiliates or signaled they may do so.

The Democrats’ anti-business tax measures could not have come at a worse time. Colorado unemployment rose to 7.4 percent as of January. The Denver Postadds, “Colorado employers last year shed nearly 17,000 more jobs than initially reported,” for a total of over a hundred thousand non-farm jobs lost. Apparently the Democrats’ motto is “kick business when it’s down.”

Unfortunately, numerous left-leaning politicians, advocacy groups, and commentators are flat-out lying about Amazon’s reasons for dropping Associates, painting the decision as arbitrary and vindictive. In fact, Amazon’s decision was a reasonable and perfectly predictable defensive move protecting the company from the unjust tax law. Yet the left has a history of blaming business for the harms of political controls.

What are the legal reasons that Amazon needed to cut off its lucrative Associates program in Colorado?

Colorado legislators have no authority to control businesses in other states. Amazon is located in Washington. The only way Colorado can require out-of-state businesses to comply with Colorado tax laws is if a business has a relevant presence in Colorado. It is Amazon’s Associates program that constitutes such a presence. By dropping its Associates, Amazon seeks to remove itself from the bureaucratic nightmare of Colorado’s tax law.

That is why, in his March 8 press release, Governor Bill Ritter points out that in dropping its Associates, “Amazon is simply trying to avoid compliance with Colorado law.” (Ritter nevertheless smears Amazon for dropping its Associates, though he is the one to blame for it.)

When Rhode Island and North Carolina tried to impose tax obligations on Amazon, the company dropped its Associates program in those states, also to avoid the tax complications. Notably, that happened before Colorado legislators passed an Amazon Tax. Because Rhode Island’s Amazon Tax cost the state revenues, that state is now considering a repeal of the measure, reports Joseph Henchman of the Tax Foundation.

Some people are confused about an amendment to the bill. They wrongly claim that, because legislators amended the bill to omit language about affiliates, Amazon would have been subject to the Colorado tax law with or without the Associates program. Therefore, these critics mistakenly argue, Amazon dropped its Associates not for any benefit to the company but merely out of spite.

Such claims ignore the fact that, regardless of the language of Colorado’s law, federal courts likely will rule that it is the Associates program, if anything, that gives Colorado the right to subject Amazon to tax rules. (Amazon is currently embroiled in a court battle with New York over the matter.) The Associates program is what plausibly establishes the company’s relevant presence in Colorado, giving the state jurisdiction.

Colorado legislators cannot rewrite the U.S. Constitution, which grants the federal government exclusive power to “regulate commerce… among the several states.” The Colorado legislature can subject an out-of-state business to tax rules only if the federal government allows it. Amazon dropped its Associates because the company reasonably believed that doing so would mean it wouldn’t have to comply with Colorado’s onerous tax law.

Thus, when Dave Taylor writes for the Huffington Post, “Amazon firing all of us Associates doesn’t change anything about their tax liability in the state,” we can only chuckle at his Constitutional ignorance. His comments presume that Colorado can subject out-of-state businesses to tax laws just because Colorado legislators say so.

The larger question, however, is whether Amazon should follow the tax law even if it’s not legally obligated to do so. No! The tax is horribly unjust, and it should be repealed whether or not federal courts allow it.

Henchman points to a compliance problem with forcing online retailers to process sales taxes. With all the overlapping tax districts, “retailers large and small must track more than 8,000 sales tax rates and bases.”* By contrast, a local shop must calculate only a single rate.

Moreover, the law needlessly mandates high processing costs. It forces targeted retailers to send tax notifications “to all Colorado purchasers by first-class mail,” and the notification “shall not be included with any other shipments.” The law forbids Amazon from sending lower-cost email notifications, further illustrating that the law is essentially about punishing Amazon, not creating tax parity.

The left should stop smearing Amazon. The rest of us should stand up against the legislature’s unjust law. Thankfully, Diana Hsieh, a former Associate, has created a web page to fight the oppressive tax measure; see RepealTheAmazonTax.com.

* Obviously, this is the case if Amazon had to calculate all the rates in all the states.

Amazon dropped its Colorado Associates because the company reasonably expects that it is only the Associates program which may grant Colorado authority to subject the company to Colorado tax laws.

Various people have wrongly argued that, because the amended bill dropped language about “affiliates,” Amazon would have been subject to the requirements of the law with or without its Associates program. However, what matters is what the federal courts regard as establishing a relevant presence in Colorado. The federal government, not the Colorado legislature, has authority to regulate interstate commerce. I have written about this matter at greater length in my previous article, “Stop the ‘Amazon Tax!'”

Here I explore the language of Colorado’s Amazon Tax in greater detail.

Originally, the bill said that “if a retailer enters into an agreement with an affiliate,” the “retailer is deemed to be doing business in this state.” In other words, the bill explicitly claimed that affiliate programs such as Amazon Associates permit Colorado to subject such retailers to Colorado tax laws.

The amended bill drops the language about affiliates. How, then, does the bill try to subject Amazon, an out-of-state businesses, to Colorado’s tax laws?

The bill amends Colorado Statute 39-26-102(8) to state, “‘Retailer’ or ‘vender’ means a person doing business in this state, known to the trade and public as such, and selling to the user or consumer, and not for resale.”

Previously the law defined a “retailer” or “vender” as “a person doing a retail business.”

Existing statute (cited by the bill) already defines the meaning of “doing business in this state.” 39-26-102(3) states:

“Doing business in this state” means the selling, leasing, or delivering in this state, or any activity in this state in connection with the selling, leasing, or delivering in this state, of tangible personal property by a retail sale as defined in this section, for use, storage, distribution, or consumption within this state. …

By these definitions, then, Amazon is “doing business in this state” by selling and shipping stuff to Colorado consumers.

The bill further amends Statute 39-21-112 by adding a new subsection. Subsection (3.5)(b) states: “For purposes of this subsection (3.5), ‘retailer’ shall have the same meaning as set forth in section 39-26-102(8).” As we’ve seen, that is the part amended to define a “retailer” as “a person doing business in this state.”

Then the bill cashes in on these definitions in 39-21-112(3.5)(c)(I), which states, “Each retailer that does not collect Colorado sales tax shall notify Colorado purchasers that sales or use tax is due on certain purchases made from the retailer and that the state of Colorado requires the purchaser to file a sales or use tax return.”

The rest of this subsection defines the penalties for noncompliance, specifies that notifications “shall be sent separately to all Colorado purchasers by first-class mail,” and specifies that the retailer must also submit a report to the state.

In other words, the Colorado law attempts to completely obliterate any “physical presence” standard in terms of subjecting out-of-state businesses to Colorado’s tax laws. This means that the Colorado legislature is attempting to utterly disregard Article I, Section 8, of the U.S. Constitution, which grants the federal government sole authority to regulate interstate commerce.

Obviously, Amazon knows that the Colorado legislature lacks the authority to impose its tax law, absent federal approval. Whether or not the Colorado bill mentions “affiliates,” federal courts are likely to require some sort of relevant “presence” in Colorado before the state can impose its tax laws on out-of-state businesses. The reason that Amazon dropped its Associates in Colorado is precisely to remove such a “presence.”

What should we make of the bill’s section on “a controlled group of corporations?” Here’s what the bill says on that matter:

Commencing March 1, 2010, if a retailer that does not collect Colorado sales tax is part of a controlled group of corporations, and that controlled group has a component member that is a retailer with physical presence in this state, the retailer that does not collect Colorado sales tax is presumed to be doing business in this state. For purposes of subparagraph (II), “controlled group of corporations” has the same meaning as set forth in section 1563 (a) of the Federal “Internal Revenue Code of 1986”, as amended, and “component member” has the same meaning as set forth in section 1563 (b) of the [same code].

So now not only do we have to see how the new law meshes with existing Colorado statutes, but we have to see how it meshes with IRS code. (Those who wish to peruse the IRS’s delightful code may find it here.)

The text quoted above is offered by the bill as an amendment to 39-26-102, which, as we’ve seen, pertains to definitions. Notice that the new section does NOT alter the other definitions about “doing business in this state.”

Notice something else important about the new definitional language: the bill is not claiming that ONLY “a retailer that does not collect Colorado sales tax [and] is part of a controlled group” and that “has a component member that is a retailer with physical presence in this state” is “doing business in this state.” That is merely one explicitly defined example. Obviously the King Soopers down the street is also “doing business in this state.” As explained above, the bill also declares that out-of-state companies such as Amazon are “doing business in this state” when the sell and ship stuff to Coloradans.

What is exasperating about this discussion is that I only just received an email claiming, “This bill has nothing to do with affiliates, as far as I can tell. … The regulations apply to anyone from Colorado making a purchase through Amazon, regardless of whether or not they come through an affiliate.”

Such commentators apparently believe that Colorado legislators are above the U.S. constitution and may impose tax laws on out-of-state businesses at will. Amazon knows better. Amazon knows that federal courts may view the Associates program as creating a relevant “presence” in Colorado, thereby granting Colorado the authority to impose tax laws on Amazon. Therefore, Amazon removed that “presence.” (I would have the courts turn to a tight standard of “physical presence” implying a store front, but Amazon cannot count on the courts to do that.)

Somebody left a comment on my previous article wondering why Amazon did not wait to drop its Associates until the company fights “this out in the courts.”

I responded:

[I]t is to Amazon’s advantage to drop the Associates right now, rather than wait for a potential court battle to play itself out. To see why, note what Amazon says about its New York court battle, which remains in appeals:

“Effective June 1, 2008, Amazon.com LLC will begin collecting sales tax on items shipped to destinations within the State of New York as New York has enacted a new law requiring out-of-state sellers to collect and remit sales tax based on advertising. Amazon has filed a lawsuit challenging the constitutionality of this provision. However, as required by the law, we must still begin collecting New York sales tax beginning on that date.”

In other words, Amazon wants to make sure that it does not have to comply with Colorado’s onerous tax provisions while a potential court battle plays out.

The Amazon Tax is unjust and unconstitutional, and it should be repealed.

Yesterday I wrote a lengthy article about the Amazon Tax. In this follow-up I review an important new study from the Tax Foundation, “‘Amazon Tax’ Laws Signal Business Unfriendliness and Will Worsen Short-Term Budget Problems.”

Note that, in my previous article, I used the phrase “physical presence” broadly, to include any sort of presence a state might claim to extend tax jurisdiction onto an out-of-state business. Joseph Henchmen, author of the Tax Foundation study, distinguishes a “physical presence” narrowly interpreted as an actual store front from an “economic presence.” I meant to include any such “presence” in my previous article. (In the broad sense, any presence must be “physical” in nature, though a “presence” need not include a physical store front so far as various states want to define it.)

Given the Tax Foundation issued a news release about the study, I’ll begin by reproducing much of that before reviewing the study itself.

As more states consider enacting so-called “Amazon tax” laws to force online retailers to collect sales taxes, a new Tax Foundation report cautions that such policies would not only fail to relieve short-term budget problems but also hurt long-term economic growth.

New York, Rhode Island, North Carolina and Colorado have Amazon taxes, and the Multistate Tax Commission last week indicated its plans to draft model legislation based on the laws in place in those states.

“Enactment of an Amazon tax is an aggressive and unconstitutional assertion of state power,” said Joseph Henchman, the Tax Foundation’s Tax Counsel and Director of State Projects, who authored the report. “These taxes are the latest in a series of efforts to eliminate the long-standing ‘physical presence’ standard and replace it with a nebulous, arbitrary ‘economic presence’ standard, where businesses can be taxed in every state where they have customers — meaning retailers large and small must track more than 8,000 sales tax rates and bases.”

“This flies in the face of the argument that Amazon taxes ‘level the playing field’ between brick-and-mortar and Internet-bases businesses,” Henchman said.

Amazon taxes (also known as affiliate nexus taxes or affiliate taxes) require retailers that have contracts with “affiliates” — independent persons within the state who post a link to an out-of-state business on their website and get a share of revenues from the out-of-state business — to collect the state’ sales and use tax. Even groups such as the National Conference of State Legislatures and the Streamlined Sales Tax Project oppose Amazon taxes.

Amazon taxes are unlikely to produce revenue in the near term, according to the report. New York continues to face a lengthy legal constitutional challenge, and Rhode Island has even seen a drop in income tax collections due to the law.

Unconstitutionally expansive nexus standards such as Amazon tax laws threaten interstate commerce and the national economy by discouraging business expansion.

“The real concern should be the extent of state powers,” Henchman said. “Should states be able to reach beyond their geographic borders and impose their tax system on everything everywhere? Do we really need to make sure that taxes are the same in all states, and that people can’t shop by tax rates as they shop by price, quality or convenience?”

Henchman reiterates the basic reason why Amazon cut off its Associates program in Colorado: the tax measure is contingent on Amazon’s “presence” in Colorado.

Henchman next points out that Rhode Island is actually losing money because of its Amazon Tax: “Rhode Island has seen no additional sales tax revenue from its Amazon tax, and because Amazon reacted by discontinuing its affiliate program, Rhode Islanders are earning less income and paying less income tax.”

What is telling is that Colorado Democrats imposed an Amazon Tax here, even after the failure of such a tax elsewhere.

Henchman reinforces another point I’ve made: “Amazon taxes also do not ‘level the playing field’ between brick-and-mortar and online businesses; the laws actually mandate disparate burdens on online businesses.” Henchman mentions that online retailers must “track thousands of sales tax bases and rates,” but Colorado’s law imposes even worse bureaucratic red tape.

Henchman describes how sixteen different states (including Colorado) have either imposed or attempted to impose an Amazon Tax.

“Use” taxes, taxes supposed to be paid by consumers on out-of-state purchases, arose in the 1930s, Henchman notes. In 1937 the Supreme Court approved “use taxes” but required them to be collected from in-state residents, not out-of-state businesses. However, Henchman notes, “use taxes are practically unenforceable.”

Henchman also includes important background on attempts of states to simplify sales taxes:

Several dozen states have banded together to form the Streamlined Sales Tax Project (SSTP), an effort to simplify and harmonize state sales taxes in the hope that Congress or the Supreme Court will permit states to enforce use tax collection obligations on out-of-state companies. While the SSTP has made notable progress on adopting uniform sales tax definitions and procedures, meaningful efforts to simplify sales taxes (such as by reducing the number of sales taxing jurisdictions or aligning them with zip codes) have been actively avoided in the hopes of attracting more members. [See also Henchman’s notes in the study.]

According to Henchman, the SSTP opposes states’ Amazon Taxes, though a few states (again including Colorado) have broken ranks and tried to run roughshod over the U.S. Constitution.

Henchman briefly describes the Colorado amendment regarding affiliates: “Colorado followed in 2010 with a version that removed language asserting that affiliates trigger the obligation to collect sales tax but that added a requirement to notify residents with use tax liability.” Notice that the amendment in no way removed the bureaucratic nightmare imposed on Amazon, as Colorado’s left has tried to pretend.

The Council on State Taxation (COST) has alerted us that the Colorado bill, HB 1193, has been amended in two significant ways.

First, the bill drops the “Amazon” affiliate nexus provision but adopts an “ordinary” attributional nexus provision similar to those seen in New Jersey and a few other states. This is a less aggressive expansion of the definition of “physical presence,” holding that a company has nexus if a “component member” of a larger “controlled group” has physical presence in Colorado. The Supreme Court has previously considered this is the “furthest extension” of nexus, and it sends a bad signal to the interstate business community.

Second, the bill makes life very unpleasant for out-of-state companies that do business in the state. Sellers must notify each buyer that sales tax is due on the transaction or face a $5 per transaction fine. Sellers must also send each buyer an annual tally of all purchases, and this information would be given to the state as well. It’s essentially all the obligations of tax collection without the actual tax collection.

Thus, while the Colorado amendment solved one problem in alleviating some burdens on Associates, it created other problems, particularly by increasing the bureaucratic burdens on Amazon.

Critically, though, the bill still requires (as it must under the Commerce Clause) a business nexus in the state; some sort of relevant “presence.” The amendment did nothing to address that (as that would have rendered the bill moot), and that is why Amazon dropped the Associates program. As I discussed, various leftist commentators have tried to pretend that the amendment makes Amazon’s decision to drop its Associates arbitrary. It does not. Amazon sought to remove its business “presence” by closing down its Associates program. Nothing about the amendment addressed that gigantic problem.

I have touched on Henchman’s major points; the rest of his study is worth perusing.

The Colorado legislature and governor recently imposed a new law saddling online retailers and their customers with severe tax liabilities and red tape. But the only way Colorado can try to tax an out-of-state company (such as Amazon) is if that company has a business presence in Colorado. As a consequence, Amazon cut off its Associates program for Colorado residents who advertise for Amazon online. The legislature was warned in advance that the tax policy could cost Colorado businesses and possibly end the Associates program.

Predictably, left-wing advocacy groups — and their lap-dog media — have decided to play the game of blame the victim, Amazon. They have utterly ignored the aspects of the law that compelled Amazon to take defensive action. Such tactics come straight out of the left’s playbook: blame business for the problems caused by political controls.

See also my follow-up article, Tax Foundation Takes On Amazon Tax. Note that the author of the Tax Foundation’s report more finely distinguishes a “physical presence” from an “economic presence” than I do here.

As reviewed in my “Disclosures Unjustly Compelled by the FTC,” I have a longstanding relationship with Amazon. (In this case offering disclosures is appropriate despite the fact that the FTC requires them.) Not only have I been an Amazon customer, but I have been an Associate and have collected some pittance from the program (less than $100 total). My book, Values of Harry Potter, also sells at Amazon. But obviously I am not taking the stance herein for any direct financial gain (of which there is very little), but because I believe that Amazon and other online retailers are being unjustly targeted by an oppressive tax law.

Denver Post Editorial

I do not mean to imply above that all media coverage of the Amazon Tax has been irresponsible. Today’s Denver Post offers an excellent summary of the situation in an editorial:

The move by online retailer Amazon to drop its Colorado affiliates was a predictable result of the legislature’s recent efforts to revoke tax exemptions.

We were convinced from the outset that House Bill 1193 was problematic, particularly in light of U.S. Supreme Court decisions that are unfavorable to states seeking to compel out-of-state retailers to collect sales taxes.

The Amazon situation only reinforces our belief that the issue of online sales tax collection ought to be addressed at the federal level.

The Colorado law requires online retailers to tell their customers how much Colorado sales tax they owe when those customers buy items by clicking through marketing affiliates based in this state. Those retailers are supposed to pass that information along to the state so the government can ensure the taxes are paid. [March 12 Update: a reader pointed out that this paragraph from the Post contains an error; the law seeks to collect the tax from all Colorado customers who buy from Amazon, regardless of whether they buy through an Associate.]

It’s not surprising Amazon decided to just cut Colorado-based marketing affiliates rather than get involved in any aspect of sales tax collection. That’s what online retailers have done to thwart so-called “Amazon laws” in other states, such as Rhode Island and North Carolina.

The Post offers additional useful information on the matter (though I disagree with some of its conclusions). It is interesting that the paper’s editorial is more fair, objective, and informative than the paper’s “news” coverage elsewhere, a matter I’ll address below.

Notice that Amazon does NOT collect sales tax for either Rhode Island or North Carolina, which explains why Amazon dropped its Affiliates programs in those states, as it has done in Colorado.

Democratic legislators have disingenuously claimed that the tax law is merely about equalizing the tax standing between local retailers and online retailers. Such claims stray far from the truth.

A local retailer is located within a particular set of tax zones (state and county, and possibly city and various special districts). Within that location, the percentage of the tax is exactly the same for each purchase. The retailer calculates the percentage, tacks on the fee to the sale, and the customer pays it. Then the retailer pays the various taxes to the various taxing entities at the alloted times.

That is most certainly NOT what the Amazon Tax requires of online retailers. Here’s what the final version of Bill 1193 actually says:

“Each retailer that does not collect Colorado sales tax shall notify Colorado purchasers that sales or use tax is due on certain purchases made from the retailer and that the state of Colorado requires the purchaser to file a sales or use tax return.”

Failure to do so results in a $5 fee per infraction. Retailers must also submit an annual tax report to customers, stating that they owe the Colorado taxes. “The notification specified… shall be sent separately to all Colorado purchasers by first-class mail and shall not be included with any other shipments.”

Furthermore: “Each retailer that does not collect Colorado sales tax shall file an annual statement for each purchaser to the Department of Revenue on such forms as are provided or approved by the Department…”

The bill is also quite vicious in its enforcement: “If any retailer that does not collect Colorado sales tax refuses voluntarily to furnish any of the information specified in [another part of] this section when requested by the executive director of the Department of Revenue [etc.], the executive director, by subpoena issued under the executive director’s hand, may require the attendance of the retailer” at a government hearing. Moreover, the director is authorized by the bill “to apply to any judge of the district court of the State of Colorado to enforce such subpoena by an appropriate order…”

Obviously, this scenario is nothing like what local retailers must endure. Consider: if Amazon makes a $10 sale to somebody in Colorado, under the law Amazon is required to send out tax documents to the customer (via first-class mail) as well as to the state, and the customer is required to pay the sales tax. The postage and time required to comply with this bureaucracy — for both Amazon and customers — could easily overwhelm any profit that Amazon makes from the sale, and it would add considerably to the total purchasing price (including the value of time spent complying with the controls).

As Amazon recognized in its letter to Associates, the obvious intent of the bill is to make doing business in Colorado living hell unless retailers “voluntarily” collect the sales taxes directly.

In other words, the bill is a vicious combination of blackmail and threat of physical force.

Speaking of Amazon’s letter to Associates, following is the text as I received it on March 8:

Dear Colorado-based Amazon Associate:

We are writing from the Amazon Associates Program to inform you that the Colorado government recently enacted a law to impose sales tax regulations on online retailers. The regulations are burdensome and no other state has similar rules. The new regulations do not require online retailers to collect sales tax. Instead, they are clearly intended to increase the compliance burden to a point where online retailers will be induced to “voluntarily” collect Colorado sales tax — a course we won’t take.

We and many others strongly opposed this legislation, known as HB 10-1193, but it was enacted anyway. Regrettably, as a result of the new law, we have decided to stop advertising through Associates based in Colorado. We plan to continue to sell to Colorado residents, however, and will advertise through other channels, including through Associates based in other states.

There is a right way for Colorado to pursue its revenue goals, but this new law is a wrong way. As we repeatedly communicated to Colorado legislators, including those who sponsored and supported the new law, we are not opposed to collecting sales tax within a constitutionally-permissible system applied even-handedly. The US Supreme Court has defined what would be constitutional, and if Colorado would repeal the current law or follow the constitutional approach to collection, we would welcome the opportunity to reinstate Colorado-based Associates.

Your Associates account has been closed as of March 8, 2010, and we will no longer pay advertising fees for customers you refer to Amazon.com after that date. Please be assured that all qualifying advertising fees earned prior to March 8, 2010, will be processed and paid in accordance with our regular payment schedule. Based on your account closure date of March 8, any final payments will be paid by May 31, 2010.

We have enjoyed working with you and other Colorado-based participants in the Amazon Associates Program, and wish you all the best in your future.

The story from the left — including advocacy groups, Democratic politicians, and various media posers — is that Amazon cut off the Associates program in Colorado merely out of vindictiveness, to “punish” Colorado for the tax law.

That left’s story is self-serving nonsense.

Amazon has a beef with the Colorado politicians who enacted the law, not with Associates. Amazon benefits from its Associates program, because that program generates sales for Amazon. The company would be foolish to cut off this source of revenue merely out of vindictiveness, as a way to “punish” those who weren’t even responsible for the tax law.

As pointed out above, the actual language of the law is severely punitive, and it imposes excessive costs on transactions. Amazon’s attempts to get out from under Colorado’s tax bureaucracy by shutting down the Associates program is, therefore, perfectly predictable and justifiable.

I was therefore surprised to read Joshua Sharf’s view that grants important premises of the left. Sharf writes:

Clearly, this proposed tax, whose enforcement would have fallen on the affiliates [in the original version of the bill], would have created a huge administrative nightmare for the thousands of small affiliates in the state, many of whom would have folded up. It was also predictable under those circumstances that companies like Amazon might have folded up and terminated their affiliate contracts. But a concerted lobbying effort, led by my friends Marc and Claudia Braunstein, who own ShopAtHome.com, a business based entirely on affiliate relationships, and by the PMA, forced the State Senate to amend the tax so that the responsibility for tracking and paying the tax falls on purchasers now, rather than sellers. In other states, Rhode Island and North Carolina, that change wasn’t made, and Amazon pulled out. But it was expected that this would save the affiliate relationships here in the state.

So here’s where both sides are wrong, and where it becomes clear that Amazon has made at least a tactical error here. Their action is clearly not an attempt to evade paying the sales tax. The administrative burden of that tax falls on buyers, not Amazon, and if Colorado attempts to force a company based in Washington State to disclose the purchases of their Colorado customers, it’s going to find itself needing a supplemental appropriation to the Attorney General’s office. In fact, the predictable failure to raise revenue, combined with the black hole of legal expenses, might actually allow this change in tax policy to qualify under TABOR.

But precisely because of that, the action makes no sense to the affiliates. Without warning, thousands of Amazon’s sales partners found their incomes eliminated, despite their efforts. This looks an awful lot like friendly fire. These are business partners that the company has alienated and insulted. These are your allies, Amazon. …

Now maybe Amazon is trying to get their affiliates to put pressure on the state to repeal the damn thing altogether, and Greg Brophy, chief among the Senators Who Get It, is already talking about that. But maybe Amazon is really ticked off at its affiliates. After all, they only lobbied to shift the administrative burden, and onto their customers, at that, rather than to stop the tax altogether. This is, at least, poor customer relations. It’s also possible that Amazon sees it as cowardly, since the affiliates were counting on Amazon to foot the legal bill to fight this thing. Never mind that Amazon could have passed some of this cost along to its Colorado affiliates in the form of reduced referral fees. But regardless of what Amazon thinks it’s trying to accomplish here, it’s awful PR.

But Sharf ignores critical elements of the bill, and he resorts to Making Stuff Up about Amazon’s alleged motives. His criticisms are therefore completely unwarranted.

True, the bill was amended to remove language about “affiliates.” But that amendment did not address the fundamental problem with the bill: the severe compliance costs loaded onto firms with a Colorado presence. The fact that some Associates (who certainly did not speak for me!) helped to amend the bill so that it screwed Amazon even harder without directly screwing Associates is irrelevant to the fundamental problem with the bill.

Amazon’s action was not about being vindictive. It was not about “punishing” Colorado or Associates. It was justifiable self-defense in response to an unjust law.

Why didn’t the Colorado legislature simply declare that all sales to Colorado residents are subject to state sales taxes? The problem with such an approach is that we live in a federalist system, in which each state remains largely autonomous, subject to federal controls.

One of the major reasons the U.S. Constitution included the “commerce clause” was to prevent protectionist taxes among the states and to spur trade within the nation. Article I, Section 8 therefore grants to the U.S. Congress the power “to regulate Commerce… among the several States.”

Colorado simply has no authority to tax businesses in other states. (Amazon is located in Washington.) The only plausible way that Colorado can tax an out-of-state business is if that business has a “physical presence” in Colorado. And that is what the dispute over Associates is all about (though one wouldn’t know it from reading dishonest reports from the left).

(Colorado does, however, retain the authority to force residents to pay a “use tax” on goods bought from out of state. Such consumer-paid taxes are extremely onerous and rarely followed; they should be repealed.)

Effective June 1, 2008, Amazon.com LLC will begin collecting sales tax on items shipped to destinations within the State of New York as New York has enacted a new law requiring out-of-state sellers to collect and remit sales tax based on advertising. Amazon has filed a lawsuit challenging the constitutionality of this provision. However, as required by the law, we must still begin collecting New York sales tax beginning on that date.

The new law is based on a novel definition of what constitutes a presence in the state: It includes any Web site based in the state that earns a referral fee for sending customers to an online retailer. Amazon has hundreds of thousands of affiliates—from big publishers to tiny blogs — that feature links to its products. It says thousands of those have given an address in New York State, although it does not verify the addresses.

The state law says that if even one of those affiliates is in New York, Amazon must collect sales tax on everything sold in the state, even if it is not sold through the affiliate. This is an extension of an existing rule that companies that employ independent agents or representatives to solicit business must collect sales taxes for the state.

I knew the left was drumming up a campaign against Amazon when I saw an article from the New York Times from December 26, 2009, titled, “Sorry, Shoppers, but Why Can’t Amazon Collect More Tax?” The attempt by Colorado Democrats to join the bandwagon therefore came as little surprise. (I am surprised, however, by how self-destructive Colorado Democrats are behaving, having engaged in an all-out war on business in the middle of an economic crunch. The Amazon Tax is only one of several destructive tax laws passed by Colorado Democrats.)

Randall Stross, author of the biased but still informative NYT article, writes:

Today, Amazon collects sales tax in only five states, which gives it a continuing advantage over companies who do collect them in all or most states. Competitors aren’t the only ones hurt by Amazon’s stance on sales taxes: it also means the loss of considerable revenue to states and localities that badly need it. …

In addition to its home in Washington State, Amazon has facilities in North Dakota, Kentucky and Kansas, and collects sales taxes in these states. The company also collects sales tax in New York, but not cheerfully: Amazon has gone to court to overturn a law passed last year that compels it to collect from New York residents.

The Denver Post’s editorial fairly describes the problems of out-of-state taxation, from a perspective of wanting to remedy the matter through federal legislation:

If and when federal lawmakers take on the issue, it will not be as simple as merely requiring online retailers to collect state sales taxes.

Sales taxes are levied based on where a customer lives and can vary within a state. Online retailers would be compelled to keep track of some 8,000 sales tax rates, according to a recently completed report by the Tax Foundation.

The report also cited the efforts of several dozen states, which have come together to create the Streamlined Sales Tax Project.
If project members could agree on a simplified sales tax structure for online retailers, such a development could undercut the main defense that online retailers have in fighting sales tax collection — that it’s too complex a task.

If Colorado legislators must insist on charging sales tax on out-of-state purchases, they should drop the onerous consumer-paid use tax, repeal the horribly unjust Amazon Tax, and band with other states to lobby for a federal fix along the lines of what the Post describes.

Of course there is a far easier way to equalize the tax burdens for Colorado retailers: repeal all sales taxes.

Obviously the legislature wouldn’t even consider doing that.

However, by arguing that the sales tax hurts local sellers, Colorado Democrats (and their Republican cohorts) implicitly grant that such taxes hurt business. The “solution,” according to these legislators, is to hurt the business of others also, so as to equalize the pain that these politicians inflict. (The Amazon Tax hurts online retailers dramatically more than the sales tax hurts local retailers, so that tax is actually protectionist in nature.)

As onerous as the sales tax is to collect by retailers operating out of a fixed location, it is exponentially more difficult to collect by mail order companies trying to do businesses within Colorado. The reason is the large number of overlapping tax districts are practically impossible to follow for a small business. (That is why I no longer make any direct sales in Colorado.) In such cases, the effort to collect the tax overwhelms any potential benefit from doing business in Colorado. It is therefore a nuisance tax that reduces the amount of business in the state.

If the legislature wanted to pursue a ballot measure to totally do away with the sales tax in this state, I would be all for it, even if the income tax were increased in a revenue-neutral way. (My preference, of course, would be to simply eliminate the sales tax and reduce state spending proportionally.) But that approach would actually work, so of course it’s not even on the table.

5280 helpfully provided the link to an article by Greg Avery for the Denver Business Journal. Avery writes:

Tuesday, high-end gadget and gift seller Hammacher Schlemmer & Company Inc. started cutting off its Colorado-based online affiliates, said Marc Braunstein, founder and president of ShopAtHome.com, a Greenwood Village-based online discounter that’s also one of the state’s largest affiliate sales websites.

New York City-based Hammacher Schlemmer’s departure isn’t the earthquake in the industry that Amazon.com’s is, but it raises the specter that other large online retailers will drop affiliates in coming days.

Amazon.com Inc. has informed its marketing affiliates in Hawaii that it is ending its business with them to avoid collecting sales tax in the state.

Lawmakers in Hawaii, following in the footsteps of North Carolina and Rhode Island, have passed legislation that would require companies to collect sales tax if they have marketing affiliates in the state. Affiliate marketers run blogs or Web sites and get a sales commission by featuring links to outside e-commerce sites.

Earlier this month, Governor Linda Lingle vetoed the unconstitutional tax collection scheme passed by the Hawaii legislature in HB 1405. Because the effective date of that bill preceded both her veto and the legislature’s veto override session, we had little choice but to end our advertising relationships with all Hawaii-based participants in the Amazon Associates Program. Now that the override session is over, and the legislature did not override Governor Lingle’s veto of HB 1405, we would like to invite all Hawaii Associates whose accounts were closed due to the pending legislation to re-enroll in the Associates Program.

Unfortunately, our governor, Bill Ritter, decided instead to screw Amazon as well as the company’s Associates and customers. But it is not too late for the Colorado legislature to return to sanity, repeal the Amazon Tax here, and allow Amazon to restore the Associates program.

Those who wish to see how the bill was amended can compare the first draft against the final bill of 1193. (See the legislative page for additional versions of the bill and notes about its passage.)

As mentioned above, the bill was amended to remove language about affiliates. However, while various parties pretend that this amendment made the bill workable for Amazon, the facts are otherwise. Amazon never promised to keep the Associates program intact with an amended bill. That was always wishful thinking on the part of certain legislators and Associates.

The amendment removed the incentive of Associates to leave Amazon — because Associates would no longer have to process the burdensome tax paperwork themselves — but the amendment certainly did NOT remove the incentive of Amazon to leave its Associates.

Most importantly, Hoover never discusses the critical importance of interstate commerce and the relevance of a business’s “physical presence” in the state. Hoover does use that last phrase, but only nine paragraphs into his piece, and in a way that fails to explain the significance of it.

Rather than explain why Amazon cut off its Colorado Associates, Hoover follows the vicious attacks of the left and pretends that the decision was arbitrary and without cause.

Hoover repeats the smears of the left:

Democrats, though, said Amazon’s action was purely a public-relations tactic, punishing affiliates even though the final version of the bill removed the in-state marketers as means of collecting the sales tax.

“They (Amazon) absolutely killed the affiliates just to show that they can,” said Sen. Michael Johnston, D-Denver.

Meanwhile, one liberal group called for a boycott of Amazon until the retailer renews its relationships with affiliates.

Amazon “chose to make an example of our state and unfairly punish their own business associates for political gain,” the group ProgressNow Colorado said in a release.

Never mind the fact that the claims of Senator Michael Johnston and ProgressNow are bald-faced lies. Apparently Hoover sees it as his job merely to repeat slander, not correct it.

Later in his article, Hoover makes believe that Amazon had no reason for its move:

Amazon spokeswoman Mary Osako on Tuesday would not explain why the retailer had ended relationships with sellers in Colorado and instead repeated phrases from a letter the company sent to affiliates over the weekend.

“Although the legislation and regulations do not require online retailers to collect sales tax, they are clearly intended to increase the compliance burden to a point where online retailers will be induced to ‘voluntarily’ collect Colorado sales tax,” she said in an e-mail that quoted directly from the statement to affiliates.

In the bill’s original form, the tax would have been collected through the in-state affiliates, as other states are attempting, but Johnston and other lawmakers helped re-engineer the bill to take affiliates out of the equation after threats from Amazon that it would dump them.

When the bill was changed, Democrats, in-state affiliates and even Republicans cheered.

Brophy wrote on his Twitter account at the time that affiliates were “no longer collateral damage in war on Amazon” and said, “Affiliates win!”

On Tuesday, though, Brophy said he was wrong. “I thought that (the new version of the bill) settled the question, but it didn’t.”
Amazon has said that it will only renew its relationships with affiliates if the law is repealed or significantly altered.

Granted that Amazon could have been more explicit in stating its reasoning for its decision, the relevance of interstate commerce and the “physical presence” of a business is obvious to anyone who conducts even a cursory investigation into the matter. As I’ve reviewed, the amendment regarding affiliates in no way resolved the problems that the law creates for Amazon. For Hoover to ignore these critical facts manifests his journalistic irresponsibility.

It is possible that somebody other than Littwin selected the title for his article: “Amazon’s use of human shields evil.” So my comments in this paragraph are directed at the party who did select it. A “human shield” means an innocent party that violent terrorists hide behind to prevent enemies from firing on the terrorists. To compare Amazon to violent terrorists is appalling and extremely unjust.

Littwin begins by declaring that Amazon is evil. Why? Because “Amazon has dropped the big one on the innocent affiliates, who have done absolutely nothing wrong except get caught in the crossfire.” It is true that the Associates (including me) are innocent and that they have gotten caught in the crossfire. But the critical point that Littwin ignores is that this fire is coming entirely from Colorado politicians. Amazon too is an innocent victim.

Next Littwin claims: “No one seems sure exactly why Amazon fired its Colorado affiliates…” However, just a few paragraphs later Littwin himself points out the reason: “states can’t force companies that are not physically in the state to collect sales tax. Amazon is somewhere in the wind, staying high above sales-tax rules.” Did Littwin really fail to notice that that is the reason “why Amazon fired its Colorado affiliates?”

Then Littwin repeats the by-now standard slander that Amazon cut off its Associates out of sheer vindictiveness, without any real reasons.

Littwin does make a good point that, because stores like Barnes and Noble, Wal-Mart, and Target definitely have a “physical presence” in the state, they pay sales tax. It does seem unfair to screw some retailers harder than others with taxes. However, as discussed above, this tax bill is hardly a fair way to solve the problem. Littwin ignores Amazon’s statement in its letter: “As we repeatedly communicated to Colorado legislators, including those who sponsored and supported the new law, we are not opposed to collecting sales tax within a constitutionally-permissible system applied even-handedly.”

At least Littwin grants: “And the reaction was not unexpected. Amazon had fired its affiliates in Rhode Island and North Carolina.”

However, then Littwin then adds that Amazon “threatened to do the same in Colorado, which is why the legislators passed a law that wasn’t based on affiliates.” The law is in fact “based on affiliates” in the sense that the Associates program is what plausibly gives Colorado tax jurisdiction over Amazon. Again, the amendment pertaining to affiliates was absolutely meaningless in terms of alleviating the compliance problems for Amazon. But Littwin can’t be bothered with such pesky facts; he’s on a crusade to demonize a business.

Michael Roberts of Westword, who sometimes leans left in his economic commentary, conducted better research on the Amaon Tax than theDenver Post’s news side did. Roberts called up “Fred Nicely, tax counsel for the Washington, D.C.-based Counsel on State Taxation (COST).” Here’s what Nicely had to say to Roberts:

It [the Amazon Tax] definitely costs money. You have to go through and provide required notices. And, rather offensively, the Department of Revenue is able to get this information electronically, but the sellers are required to provide the information to the purchasers via the cost of first-class mail.

And there’s another side of the equation — a problem that’s twofold. The states can impose huge penalties for a failure to collect the tax. But if you incorrectly charge tax for something that’s not taxable, you open yourself up to class-action lawsuits from purchasers. So you can be hit both ways. …

The hope is that legislators in Colorado will potentially do what Rhode Island is exploring, which is repealing its legislation. They may have to potentially make some changes to the state’s constitution. But with other states, they should definitely be looking at complying with the Streamlined Sales and Use Tax Agreement. Those are steps Colorado should take.

Roberts reports that Nicely supports “a nationwide agreement that levels the playing field for companies interested in operating across state lines,” such as promoted by the Streamlined Sales Tax Governing Board. Roberts isn’t sure such an effort can be successful, but at least he fairly reviewed it.

Nice reporting, Westword. I hope you inspire the Denver Post to return to real journalism.

I’ve covered the basic issues above. However, it might be useful to collect, summarize, and where appropriate criticize other commentary on the matter.

The single-term, economically illiterate governor Bill Ritter issued an evasive media release that effectively illustrates why he dropped out of the governor’s race.

Ritter does make one important concession in stating, “the fact is that Amazon is simply trying to avoid compliance with Colorado law and is unfairly punishing Colorado businesses in the process.” Ritter thereby grants what so many leftists in this state have tried so hard to evade: Amazon dropped the Associates program because that was the only way Amazon could extricate itself from Colorado’s onerous and business-killing tax bureaucracy. The only unfairness is the unjust tax law perpetrated by Bill Ritter and the Democratic legislature.

Yesterday, [State Representative Jack] Pommer once again lead the anti-business attack when Amazon announced its decision to cut ties with Colorado affiliates. Later in the day, Ritter, Senate Majority Leader John Morse, D-Coloardo Springs, and Sen. Rollie Heath, D-Boulder, piled on the insults, calling Amazon’s decision “selfish” and “unjustified”.

In an early post for the Denver Post, Jessica Fender described aspects of the case. Fender precedes Hoover in fixating on the irrelevant amendment about affiliates while ignoring the much bigger issue of a business’s “physical presence” in the state.

Fender does usefully quote Pommer as calling Amazon’s action “flat out blackmail.” In other words, Pommer believes that Amazon declining to submit to the legislature’s blackmail is itself an instance of blackmail. What a vicious little troll.

T. L. James of People’s Press Collective reviews State Senator John Morse’s rant against Amazon. However, James wrongly characterizes Amazon’s move as “symbolic.” For reasons explained above, Amazon’s action was legal self-defense with very practical implications for the company.

Over at the Huffington Post, Carol Hedges laughably claims that “firing the Colorado affiliates in no way changes Amazon’s obligation under Colorado law.” She disproves her own statement by pointing out, “However, if an Internet retailer does not have a physical presence in the state, it is are not compelled to collect tax.” So which is it, Hedges? Hedges then proceeds with the typical leftist libel that Amazon “needlessly fired all of its Colorado affiliates, apparently out of spite.” What hogwash. The fact that Hedges is a “Senior Policy Analyst” with the Colorado Fiscal Policy Institute offers a pretty good indication of the value of that organization.

March 11 Update: Following in Hedges footsteps, Dave Taylor adds his nonsense to the Huffington Post. Taylor claims, “as Carol points out in the earlier Post article, Amazon firing all of us Associates doesn’t change anything about their tax liability in the state. The only way they can affect that is to simply stop selling product to everyone in Colorado.” Taylor’s statement is an outright fabrication. It has absolutely no grounding in the facts. If the Huffington Post cared anything about quality control, it wouldn’t publish such obvious distortions.

Tomasic begins by pretending that Amazon’s action is some sort of grand mystery, then he reviews the leftist smears of Amazon. He does quote aWall Street Journal article that inexplicably confuses the amendment pertaining to affiliates with anything that matters. However, citing the same Wall Street Journal article, Tomasic then proceeds to explain exactly why Amazon cut off its Associates:

The similar North Carolina and Rhode Island laws passed last year held that Amazon’s in-state affiliated sites amounted to “a physical nexus” or presence in the states and so required the company to pay state taxes. Amazon disagreed, arguing that links at affiliate sites amount merely to promotion or advertising not a physical presence or some kind of local franchise representation. Amazon lost the battle and so pulled its affiliate business in those states.

So what exactly is the mystery here, Tomasic? He claims that “Colorado’s law makes no mention of the ‘affiliate-nexus’ argument,” but Amazon’s “physical presence” in the state is the entire legal premise on which the law is based.

But then I have never seen Tomasic attempt to serve as anything other than a Democratic lap dog.

Nat Torkington whines that he got “fired for something outside [his] control,” forgetting that the vindictive Colorado legislation was also outside of Amazon’s control. Justice demands a clear identification of the victim — Amazon — and the perpetrators of the injustice — the Colorado politicians who passed the unjust law.

Chuck Plunkett of the Denver Post points out, “There were plenty of signals that repealing a tax exemption for online retailers would face legal challenges and possibly just such a move as Amazon launched today.” Plunkett also wonders why Denver Mayor John Hickenlooper, who is running for governor in Ritter’s place, declined to take a position against the tax measure.

The far-left ProgressNow (more aptly called Regress Now) has called for a boycott of Amazon. Regress Now’s commentary utterly ignores the destructive, protectionist nature of the tax bill.

With the socialist left demonizing Amazon and calling for a boycott, now is an excellent time to do some business with Amazon, in the name of justice.